10-QPeriod: Q3 FY2018

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 30, 2018For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported revenues of $4.078 billion for the third quarter of 2018, an increase of 8.3% year-over-year, driven by demand for digital services and growth across most business segments. Net income for the quarter was $477 million, a decrease of 3.6% compared to the prior year, impacted by higher income tax provisions and foreign currency exchange losses. For the nine months ended September 30, 2018, revenues grew by 9.2% to $11.996 billion, while net income decreased by 4.5% to $1.453 billion, reflecting similar pressures as seen in the quarterly results. The company successfully adopted the new revenue recognition standard (ASC Topic 606) effective January 1, 2018, which had a positive impact on reported revenues and income from operations for the current periods. Cognizant also continues its business realignment to focus on digital services and efficiency. The company ended the quarter with a strong balance sheet, including $1.339 billion in cash and cash equivalents, and has an ongoing stock repurchase program with $775 million remaining authorization.

Financial Highlights

49 data points
Beta

Revenue

$4.08B

Net Income

$477.00M

11.7% Net Margin

EPS (Diluted)

$0.82

Total Assets

$15.27B

Cash & Equivalents

$1.34B

Free Cash Flow

$768.00M

Financial Statements
Beta
Revenue$4.08B
SG&A Expenses$723.00M
Operating Income$745.00M
Interest Expense$6.00M
Net Income$477.00M
EPS (Basic)$0.82
EPS (Diluted)$0.82
Shares Outstanding (Basic)579.00M
Shares Outstanding (Diluted)580.00M

Key Highlights

  • 1Revenues increased by 8.3% to $4.078 billion in Q3 2018, driven by strong demand for digital services and growth in key segments like Communications, Media and Technology, and Healthcare.
  • 2Net income for Q3 2018 decreased by 3.6% to $477 million, primarily due to higher income tax provisions and unfavorable foreign currency exchange movements.
  • 3The adoption of ASC Topic 606 (new revenue standard) effective January 1, 2018, positively impacted Q3 revenues by $33 million and income from operations by $37 million.
  • 4Operating margin improved to 18.3% in Q3 2018 from 17.2% in Q3 2017, reflecting improved cost management and favorable currency impacts, though offset by higher tax provisions and FCPA accruals.
  • 5Cognizant is actively repurchasing shares, with $25 million repurchased in Q3 2018, and has $775 million remaining under its authorized stock repurchase program.
  • 6The company has accrued $28 million for a probable loss related to an ongoing FCPA investigation, underscoring a significant legal and regulatory risk.
  • 7A dispute with the Indian Income Tax Department regarding past share repurchases could result in additional tax liabilities, though Cognizant believes taxes owed have been paid.

Frequently Asked Questions

Cognizant adopted ASC Topic 606 using a modified retrospective method starting January 1, 2018. For the three months ended September 30, 2018, this adoption resulted in a positive impact of $33 million on revenues, $37 million on income from operations, and $0.05 per share on diluted earnings per share.

The operating margin for Q3 2018 improved to 18.3% from 17.2% in the prior year. Key drivers include a decrease in compensation and benefit costs as a percentage of revenue, and the depreciation of the Indian Rupee against the U.S. Dollar. These positive factors were partially offset by increased fees for digital operations, platform, and infrastructure services, the impact of the FCPA accrual, and lower gains on cash flow hedges.

Cognizant has substantially completed its internal investigation into potential FCPA violations. The company has recorded an accrual of $28 million for a probable loss related to discussions with the DOJ and SEC. While the investigation is progressing, the timing of a final resolution is uncertain, and there is potential for further sanctions, fines, or remedial measures that could materially impact the business.

Cognizant announced a plan to return $3.4 billion to stockholders over two years. As of September 30, 2018, the company had repurchased $2.7 billion in stock via ASRs and paid $617 million in dividends. The company is currently reviewing its capital return plan, considering factors like the Tax Cuts and Jobs Act, financial performance, and strategic investments. It has $775 million remaining under its authorized stock repurchase program.